At the meeting yesterday with a brilliant entrepreneur I've been working with, we dealt with 5 guiding questions each startup /entrepreneur must address when preparing a sales forecast:
5 guiding questions
Should they heed conservative or optimistic estimations of the market and what is the investors' view?
How do we establish market penetration percentage and the likelihood of evaluating the Serviceable Obtainable Market?
Should we consider competitors in the sales forecast?
Is it better to generate a yearly or three-year sales forecast ?
If the forecast does not reach values demonstrating scalability, what comes next?
Experience says to heed conservative market estimations, at least in months 0-12 of the startup and gradually move to more optimistic evaluations.
Present a clear trend demonstrating growth potential and understanding of the organization and competition's resources available. Exaggerated market penetration estimations and presenting overly high numbers will forge a two-edged sword for the entrepreneur.
Recommendation: Begin with conservative estimations and after 12 months move towards optimistic estimates.
If we continue with the conservative penetration percentage, the initial-stage percentages (depending on the field) may depend, at first, on 0.1%, growing in small leaps quarterly.
Recommendation: To begin penetration with 0.1%, at times a 0.01%, and then grow.
The probability of actually closing a deal stems from the percent of penetration. Investors/VC's are shown with reservations in two competing external parameters and manpower for sales & marketing.
For example, if I reached 10 potential clients and there are 4 competitors (nearly equal), what is the likelihood of my closing a deal. The likelihood is 20%. I'll close the deal with 2 clients.
Recommendation: Only a presentation by startup companies to investors will alter the reservations regarding the two parameters, direct competitors and manpower.
In a dynamic market, the recommendation is to present a 2-3 year sales forecast, while in the mid to long-range other parameters should be addressed; success stories, G2M strategy and more.
Recommendation: Based on what's accepted in the field
If the sales forecast is not scalable, several additional sensitive issues should be considered; choosing another geographic market, more optimistic penetration and deal-closing percentages (some entrepreneurs are trapped by the idea and may exaggerate), business model and low pricing compared to competitors.
Recommendation: If all of the above were examined and the picture hasn't changed, the flag needs to be raised and a "No Go" decision made.
It's better to confirm the idea before investing time and effort and to reduce the risk and uncertainty inherent in developing a product/service.